Govt says GST won’t raise cost of most services; experts not so sure

The Centre and states on Friday crossed another major milestone towards launching GST (goods and services tax) by agreeing on a four-tier tax structure for services that should make economy class air travel and cinema tickets cheaper.Rajeev Deshpande&Sidhartha | TNN | May 20, 2017, 08:31 IST

Highlights

The four slabs of 5%, 12%, 18% and 28% for services mirror the GST rates on goods.,

The GST Council opted for the highest slab of 28% levy on rooms and restaurants in five-star hotels.,

Tax consultants said that for some services there may be a significant increase in the tax burden.,

SRINAGAR: The Centre and states on Friday crossed another major milestone towards launching GST (goods and services tax) by agreeing on a four-tier tax structure for services that should make economy class air travel and cinema tickets cheaper.

The government maintained that cost of other services will not rise, but not all industries and tax consultants are as convinced. The four slabs of 5%, 12%, 18% and 28% mirror the GST rates on goods announced on Thursday.

The GST Council, headed by Union finance minister Arun Jaitley and comprising state finance ministers, opted for the highest slab of 28% levy on rooms and restaurants in five-star hotels, along with cinema tickets and betting at race courses, while pegging the rates on telecom and financial services at 18%.

Despite the highest rate being applied to cinema tickets, the government said, it’s still lower than the current levy, including entertainment tax of 45% to 100% that states levy (but local government/municipal taxes could push up prices later).

Education and healthcare will continue to be exempt from tax. The GST system will subsume the various Central and state taxes – such as excise, value-added (VAT), service, octroi and entertainment – into a common all-India system, with transparency as one of its prime objectives.

When asked by the media about the impact on mobile bills and other services in the 18% slab, Jaitley said, “Although the headline rate may appear higher (than the current 15% service tax), the actual incidence will be lower since companies will get input tax credit for goods that they use. If companies don’t pass on the benefits, we have the antiprofiteering clause.”

The government strongly argued that input tax credits will reduce the final tax burden and prevent services from becoming more expensive.

If companies do pass on the credit they get, government calculations indicate that inflation may decline by 2%, revenue secretary Hasmukh Adhia told TOI. State finance ministers echoed the view that overall there will be no price rise.

“We have made sure that consumers don’t have to pay more. The net impact on the system will not be inflationary,” Jaitley said. For mobile operators, there will be a 3% cost reduction due to input credit, Adhia said. “The effective rate will be 15%,” he added.

Tax consultants, however, said that for some services there may be a significant increase in the tax burden. “An 18% tax on most services would lead to a 20% hike in services bills on most services, including telecommunication,” said Priyajit Ghosh, partner for indirect tax at consulting firm KPMG, while adding that the burden for cab and air travel will come down.

This will increase the incidence of tax for customers from the existing 15% to 18%. Having said this, industry has been seeking clarity on the list of exemptions,” said ICICI Lombard CFO Gopal Balachandran.

The telecom industry too suggested that the burden may rise. “We had submitted to the government that consideration must be given to the present financial condition of the sector and any rate beyond the existing rate of 15% makes the telecom services more expensive for the consumer. It will augment the existing burden of the industry further,” said Rajan Mathews, director general of industry lobby group COAI.

Eating out is also expected to get costlier with the levy on AC restaurants with liquor licence rising to 18%. Although the government said that there was no increase, unlike telecom or insurance, it is virtually impossible to monitor how the levy is imposed across the country. Competition will take care of prices in the case of restaurants, Adhia argued.

Cab aggregators such as Ola and Uber will face a 5% tax, but second-class and local trains and non-AC city buses will be exempt from GST. The effective rate for transporting goods is currently 6% and along with input tax credit, the levy should come down marginally, Adhia said. Business class air travel will attract 12%; but if you fly economy or take an AC train coach, it’ll be 5%.

With most of the heavy lifting out of the way, the GST Council will now meet on June 3 to decide on the levy on lottery and a few category of goods — gold, biscuits, footwear, textiles, bidis, pearls, precious and semi-precious stones and imitation jewellery, coins and power-driven farm equipment.